Commentary: Students beware: Income-based loan repayment can cost you

FILE- In this June 15, 2018, file photo, twenty dollar bills are counted in North Andover, Mass. Default on your federal student loans and the government can take up to 15 percent of each paycheck to satisfy your debt. The Education Department can also withhold federal benefits like tax returns and Social Security payments. Garnishment is an effective tool to recoup unpaid loans, private collection agencies enlisted by the Education Department took in over $841.6 million via wage garnishment in the 2018 fiscal year, but it inflicts serious financial strain on borrowers who are already struggling. (AP Photo/Elise Amendola, File)

What goes up must come down. Except your age and college tuition.

America’s colleges welcomed nearly 20 million people to campus last fall. College enrollment has shot up 30 percent in roughly two decades. Given that college graduates earn 56 percent more than high school graduates, that’s great news.

The bad news? Tuition is increasing faster than the general inflation rate and has been for many years. Today, 44 million Americans are saddled with student loan debt, totaling $28,500 on average. Graduating professionals may be able to pay that debt. But for others, especially those who didn’t even finish, student loans can be a crushing, dispiriting challenge.

To help students address their debt, Congress has set up several programs that allow borrowers to tie their monthly payments to their post-graduate income. Colleges often nudge students toward these “income-based repayment programs” as they promise affordable monthly payments and the possibility that some debt will be forgiven. But since there’s no such thing as a free lunch, income-based repayment programs can impose huge future costs on borrowers.

Take Income-Based Repayment (IBR). This federal program originally let student borrowers cap their annual payments at 15 percent of their disposable income and stretch the loan out to 25 years. Any debt left after 25 years would be erased. Later changes lowered the cap to 10 percent, shortened the repayment period to 20 years, and expanded the program to those with existing loans.

Unsurprisingly, enrollment in these plans is exploding. Between March 2017 and March 2018, the number of direct loan borrowers enrolled in IBRs plans jumped 11 percent. Today, more than 7 million borrowers use them.

IBRs can certainly be enticing. But they can make borrowers' finances worse. While they reduce borrowers' monthly payments, they do so by extending the length of loans. That means accrued interest charges over 20 — or even 25 years — rather than the standard 10.

The math is as simple as it is frightening. For a graduate making $35,000 per year, a 10-year, $30,000 direct unsubsidized student loan with a 4 percent interest rate will cost that borrower roughly $300 a month — including about $6,400 in interest. Repaying that loan over 20 years, by contrast, would rack up nearly twice as much in interest charges — almost $12,000.

A borrower with a truly low income can come out ahead. Take someone with $30,000 in direct unsubsidized student loan debt who earns $25,000 a year after graduating. His monthly payments would be just $57. After 20 years, his $15,000 balance would be forgiven. But that balance doesn’t go quietly. The government treats loan forgiveness as income. So our hypothetical borrower would have to pay taxes on that $15,000. Depending on his income bracket, he could face a sizeable tax bill.

IBRs are also complicated. Monthly payments are based on a borrower’s “disposable” income, family size and other factors. So payments change year to year. To stay in the program, borrowers must fill out forms each year certifying all this information. If they don’t, their loans could revert to the standard 10-year loan, with any unpaid interest added to the loan balance.

The worst effect of IBRs is that they encourage students to borrow more money than they otherwise would, assuming they won’t have to pay it all back. Given the political rhetoric floating around, they can be forgiven for this assumption. IBRs also encourage colleges to raise tuition at astronomical rates, counting on easy federal loans to provide the money to cover the increases.

IBRs certainly work well for those dedicating themselves to low-paying, but important careers like social work. But, for most, an IBR loan is little more than a siren song. Rather than creating ever-more ways for students to defer repaying loans, Congress should encourage colleges to keep tuition low and encourage borrowers to pay off their debts as quickly and inexpensively as possible. Purdue University, among others, has shown that this idea is neither impossible nor unreasonable. Given today’s political environment, that is likely more than we can ask for. But in the meantime, potential student borrowers should consider the numbers laid out above and go into the student loan game with their eyes open to its total costs and risks.

Gordon S. Jones

Gordon S. Jones, a survivor of the student loan trap, teaches history and government at Utah Valley University and Williamsburg Learning Academy.

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